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Last Updated : May 28, 2018 04:38 PM IST | Source: Moneycontrol.com

Want to beat volatility in expiry week? Deploy Long Iron Butterfly spread on Nifty

With put writers eager to write contracts at the 10,400 strike price and call writers looking to write contracts at around 11,000, the market is expected to gyrate within this band for the next couple of weeks.

Shubham Agrawal

Benchmark indices have witnessed wild swings in the last couple of weeks. After a selloff, the Nifty hit a low of 10,417, but strong put writing at the 10,500 strike price and short covering led to sharp recovery.

The indices ended the past week nearly unchanged from the week before, with the Bank Nifty outperforming the Nifty by 1.5 percent. A depreciating rupee, higher crude oil prices and quarterly earnings of companies were the primary reasons behind the spike in volatility during the May series.

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With put writers eager to write contracts at the 10,400 strike price and call writers looking to write contracts at around 11,000, the market is expected to gyrate within this band for the next couple of weeks.

While call writers dominated the initial half of the week, the latter half belonged to put writers. Week-over-week (WoW), the highest incremental build up in open interest was seen in the 10,600 call option and the 10,500 put option, which had open interests of 9 lakh and 14 lakh contracts, respectively.

The Nifty's 'option pain', also known as max pain, is placed at 10,600. (Option pain is a point that will cause maximum pain to the option buyer and least pain to option seller on expiry day).

Foreign institutional investors (FIIs) widened their short positions in the Indian market, selling Rs 3,054 crore in index futures, with a net increase in open interest of 35,000 contracts on the short side. Their long-to-short ratio in index futures fell from 1.38 to 0.88 in two weeks.

In index options, most of the participant's activity remained muted, as FIIs and proprietary brokerage firms went net long through synthetic futures ( long call + short put) while clients created synthetic short futures (long put + short call).

With lack of aggression among participants for the creation of fresh directional trade, the market is expected to be range-bound in expiry week. As the Nifty is expected to be range-bound, a Long Iron Butterfly spread is recommended to take advantage of faster theta decay.

An Iron Butterfly spread is a range-bound strategy, which combines the Bull Put spread and Bear Call spread.

It is recommended when the trader is looking to execute a high yielding trade at a very low cost, where maximum profit comes when the stock is at the middle strike price at expiry.

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Disclaimer: The author is CEO & Head of Research at Quantsapp Private Limited. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on May 28, 2018 08:55 am
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